Unexplained Wealth Orders: An overview of the regime to date

18 June 2020

Unexplained Wealth Orders (UWOs) were introduced pursuant to the Criminal Finances Act (CFA) 2017 in order to bolster the UK’s proceeds of crime regime and they have been the subject of much media attention because of the vast sums of money and high value property involved. The NCA and other law enforcement agencies have now had over two years to avail themselves of this investigatory tool and in this blog we consider the challenges that have arisen and what lessons have been learnt to date.
 

Background

In their 2017 Impact Assessment the Home Office concluded that the size of the UK’s financial and professional services sector, the open economy and the attractiveness of the London property market to overseas investors made the UK unusually exposed to financial crime. It found the current anti-money laundering legislation inadequate and considered that the new measures introduced by the CFA 2017 would enable law enforcement agencies to be increasingly effective in seizing the proceeds of crime.

The UWO specifically was the government’s response to the difficulty in bringing civil recovery proceedings where there was little information about an individual’s source of wealth and they were reliant upon assistance from other jurisdictions to provide evidence that the assets in question were the proceeds of crime. The UWO instead places the onus on the subject of the order (the respondent) to explain the origin of assets that appear to be disproportionate to their lawful income.

How is a UWO granted?

Only an enforcement authority can apply to the High Court for a UWO (the NCA, HMRC, the FCA, the Director of the SFO and the DPP). Agencies which do not have this power can however refer a case to an authority that does.

The High Court may grant a UWO in respect of any property if it is satisfied that:

  • There is reasonable cause to believe that respondent holds the property (whether in entirety or in part with others) and that the value of the property is greater than £50,000.
  • There are reasonable grounds for suspecting that the known sources of the respondent’s lawfully obtained income would have been insufficient for the purposes of enabling the respondent to obtain the property.
  • The respondent is either a politically exposed person (PEP) or there are reasonable grounds for suspecting that the respondent (or a person connected to the respondent) is, or has been, involved in serious crime (anywhere in the world). A ‘politically exposed person’ means an individual who is, or has been, entrusted with prominent state functions by an international organisation or by a state (other than the United Kingdom or another EU state) or an individual who is a family member or known to be a close associates of a PEP (s.362B(7) CFA 2017).

A UWO requires the respondent to provide a statement setting out:

  • The nature and extent of their interest in the property.
  • How they obtained the property (including how any costs incurred in obtaining it were met).
  • Details of any settlement that holds the property as may be specified in the order.
  • Other information in connection with the property as may be so specified.

Once the respondent has complied with the UWO, the enforcement authority must decide within 60 days what if any enforcement or investigatory proceedings ought to be taken (for example confiscation or civil recovery proceedings).

If the respondent fails, without reasonable excuse, to comply with the requirements imposed by a UWO before the end of the response period, the property is presumed to be recoverable property for the purposes of any proceedings taken in respect of the property under Part 5 of POCA (civil recovery of the proceeds of unlawful conduct). Note that this presumption can be rebutted by the respondent in any such proceedings. Further, if the respondent makes a statement that they know to be false or misleading in a material particular, or is reckless in doing so, then they commit a criminal offence. Finally the UWO can include a penal notice which means the respondent may be in contempt of court if they disobey the order for which they can be committed to prison.

In conjunction with the application for a UWO, the authority can also apply for an interim freezing order (IFO) to prevent the sale, transfer or dissipation of the property whilst the UWO is in place. The cases to date suggest an IFO will be applied for in the majority of UWO applications.

 

What UWOs have been granted to date?

R v Hajiyeva

The Home Office assumed there would not be any UWO cases in the first 12 months of the provision coming into force as part of the learning curve of its use but thereafter they could be 20 cases per year. In fact in February 2018, within the first month of its enactment, the NCA had applied for and been granted two UWO’s in respect of property totalling £22 million in what Transparency International heralded as a ‘landmark moment’. The respondent in this case was Zamira Hajiyeva, the wife of the former chairman of the International Bank of Azerbaijan (she was not properly identified until October 2018 when reporting restrictions were lifted) and the NCA alleged Mr and Mrs Hajiyeva had obtained their wealth through foreign corruption. On paper Mrs Hajiyeva was the ideal first target for the NCA with media generating details of her spending habits at Harrods (please see our related blogs ‘Media focus on first ‘McMafia law’ challenge’ and ‘Diamonds are (not) forever: NCA keeps up pressure on unexplained wealth’).

The case claimed another ‘first’ when Ms Hajiyeva applied to discharge the order in July 2019. The Hon Mr Justice Supperstone in the High Court rejected all eight grounds of Mrs Hajiyeva’s application and refused leave to appeal. In the event permission was later granted to appeal on the basis that the appeal raised issues in relation to the first UWO case to come before the courts and that it would be beneficial to have guidance from the Court of Appeal on the scope of statutory powers underlying UWOs.

The appeal was finally heard and dismissed in February 2020 by the Court of Appeal. Mrs Hajiyeva accepted that the property in question had been acquired using her husband’s wealth but she argued the court was wrong to rely on the fact of Mr Hajiyeva’s convictions in Azerbaijan for fraud and embezzlement as evidence that his lawful income was insufficient to have acquired the property because of the unfairness of his trial. The Court of Appeal disagreed on the basis that the fact of his conviction was ‘only one of the strands relied upon’.  Other failed grounds of appeal included the assertion that the Judge had erred in his interpretation of the statutory test for identifying a PEP and that the UWO offended the rule against self-incrimination and spousal privilege.

As a consequence of losing her appeal Mrs Hajyeva was ordered to pay the NCA’s legal costs and most importantly of course would have had to comply with the terms of the original 2018 order subject to a further appeal. Although the Court of Appeal refused her leave to take her case to the Supreme Court, Mrs Hajyeva has applied directly to the Supreme Court for permission to appeal and this application has yet to be determined.

R v Baker & Ors

In May 2019 the High Court granted three UWOs in respect of London property worth £80 million which the NCA alleged had been acquired by the late Mr Rakhat Aliyev as a means of laundering the proceeds of unlawful conduct (please see our related blog ‘Unexplained Wealth Orders for prime property’). Mr Aliyev was a former senior government official in Kazakhstan accused of bribery, corruption and murder at the time of his death in 2015.

The three properties were held by offshore private foundations and the respondents to the UWOs were Mr Baker (a UK solicitor and president of two of the foundations) and the foundations themselves. In August 2019 the respondents, in conjunction with Mr Aliyev’s former wife and his son (Dr Nazarbayeva and Nurali Aliyev), voluntarily provided information about the purchase and transfer of the properties, their registered owners and the ultimate beneficial owners. The respondents asserted that the purchases were unconnected to Mr Aliyev and his alleged criminal activities, and that he had never been the ultimate beneficiary of the properties. The NCA nevertheless declined to withdraw the UWOs, which led ultimately to the respondents’ application to discharge them.

On 8 April this year all three UWOs and related interim freezing orders were discharged (please see our blog ‘Unexplained Wealth Orders discharged – “tenacious” NCA to appeal’). In concluding that the conditions for granting the UWOs were not met, Mrs Justice Lang ruled that the NCA’s underlying assumptions that Mr Aliyev was the founder of the foundations and had provided their funds were ‘unreliable’. In addition she found ‘cogent evidence’ that Dr Nazarbayeva and Nurali Aliyev had established the companies which owned the properties and provided the lawful funds to purchase them.

The court considered the NCA’s concentrated focus on the structures used by the ultimate beneficial owners to transfer and hold the properties. Mrs Justice Lang warned ‘the use of complex offshore corporate structures or trusts is not, without more, a ground for believing that they have been set up, or are being used, for wrongful purposes, such as money laundering. There are lawful reasons – privacy, security, tax mitigation - why very wealthy people invest their capital in complex offshore corporate structures or trusts. Of course, such structures may also be used to disguise money laundering, but there must be some additional evidential basis for such a belief, going beyond the complex structures used.’

The court also considered the decision of the NCA to argue there was reasonable cause to believe Mr Baker held two of the properties because his position as President of the Foundations meant he had effective control or in the alternative that he was the trustee of the settlement in which the properties were held. The court held that Mr Baker did not hold the properties and that he was not the appropriate respondent in this case. Mrs Justice Lang considered that ‘the NCA’s reasoning was artificial and flawed’ when it considered whether the respondents’ lawfully obtained income would have been insufficient to obtain the property because they were not the legal or beneficial owner of the property. The NCA instead should have considered the actual extent of Mr Baker and the other respondents’ interest in the properties and then whether his or its lawful income was sufficient to have acquired it.

Update - 16 July 2020

This was the first time the High Court has acted to discharge such orders and the NCA immediately appealed, recognising that the court’s findings in R v Baker would ‘establish the case law on which future judgments will be based, so it is vital that we get this right.’ Unfortunately for the NCA, the Court of Appeal refused their application to appeal Mrs Justice Lang’s ruling on 17 June and did so unequivocally without the need for an oral hearing. This means that the Court of Appeal’s decision is final and the NCA will now have to pay the respondents’ significant legal costs (they are seeking £1.5 million). In her written order, the Rt. Hon. Lady Justice Carr was clear that the NCA had ‘no real prospect’ of successfully appealing the discharge of the UWOs and so the case did not offer the opportunity for further judicial interpretation that might have otherwise been beneficial (please see our related blog ‘End of the road for the NCA in NCA v Baker’ for further details).

Serious Crime UWOs

In July 2019 the NCA obtained UWO’s in respect of two separate cases both involving allegations that the respondents were involved in serious organised crime. The first set of UWOs were granted against a UK businessman, Mansoor Mahmood Hussain, in respect of property worth £10 million in total. Mr Hussain has been subject to further orders since; the NCA considered Mr Hussain’s response failed to comply with the UWOs and used this non-compliance as evidence that the properties were the proceeds of crime to obtain an Account Freezing Order and Property Freezing Orders in January and February this year respectively (see our related blogs ‘NCA relentless in demand for answers to unexplained wealth’, ‘Subject of Unexplained Wealth Order now hit with Account Freezing Order’ and ‘NCA obtains first UWO against a suspected organised criminal – a change in approach’).

Shortly afterwards the NCA obtained UWOs in respect of six properties in London and Northern Ireland worth approximately £3.2 million in total. The respondent is a Northern Irish woman whom the NCA believed was associated with criminals involved in paramilitary activity and cigarette smuggling.

 

What lessons have been learnt since the introduction of UWOs?

Whilst the two recent challenges to the UWO regime turn on their own specific facts, they are undoubtedly useful for their interpretation of the legislation and guidance on the procedure involved.

Investigations into PEPs and their families and individuals involved in serious crime are complex and time consuming and the relatively small number of UWO applications to the High Court to date suggest that the NCA (the only enforcement authority to use UWOs thus far) are proceeding carefully. The case of R v Baker will undoubtedly also lead to some serious reflection by the NCA of their approach to applications involving offshore trusts and their continuing duty to evaluate information provided by respondents.

The properties which have been the subject of UWOs represent a cumulatively vast sum of money but have not, as yet, led to actual recovery of the proceeds of crime. This does not however detract from the significant benefit of the UWO as a powerful investigatory tool which can compel respondents to make statements and provide details of their private and personal lives and financial matters at the initial early stages of an investigation. To their credit the NCA have not focused only on the smaller cases, as some feared they might given the low de minimis value requirement, and their recent applications against those associated with serious crime in the UK reflect their intent to ‘act against those who we believe are causing the most harm to our communities.’

From a respondents’ perspective, R v Baker makes a good case for being proactive rather than reactive but of course there will be circumstances when it is not advisable to voluntarily provide information and the Court of Appeal in R v Hajiyeva concluded that the report Mrs Hajiyeva provided in order to demonstrate her husband was a high-net worth individual ‘posed more questions as to the source of [Mr Hajiyeva’s] wealth than it answered’.

It is also of note that all the UWOs to date have been in respect of real property, where the statute also allows for a UWO to be granted in respect of money, real and personal property, things in action and all other intangible or incorporeal property but perhaps this will change when the NCA and other authorities become more confident in their use of them.

 

Further Information

If you are affected by a UWO or an Account Freezing Order - and we anticipate that ever increasing numbers of individuals will be so affected in the coming months and years - it is critical to obtain specialist legal advice at the earliest possible opportunity. Deciding on the appropriate strategy at the outset will maximise the chances of a positive outcome. Our team of asset forfeiture and proceeds of crime lawyers have extensive experience of challenging these orders and of engaging effectively with law enforcement and the courts.

For more information on UWOs please see our related blogs here.

 

About the author

Jonathan Grimes is a Partner in the Criminal Litigation Department who specialises in serious and complex criminal cases. He represents individuals and organisations in all areas of financial services and business crime as well as health and safety and related areas. He has acted in numerous cases involving allegations of financial wrongdoing and has experience of investigations by SFO, FCA, HMRC, CMA, NCA and the police as well as a number of foreign investigative authorities. He has particular expertise dealing with law enforcement applications that seek to freeze or seize assets, including Account Freezing Orders and other applications made under the Proceeds of Crime Act (POCA). He frequently gives advice on money laundering issues including on the making of suspicious activity reports (SARs).

Ed Smyth is a Senior Associate in the Criminal Litigation Department and represents individuals and corporates involved across the full spectrum of criminal and quasi-criminal matters. He has considerable experience of confiscation and asset forfeiture proceedings and of challenging the exercise of search and seizure powers. He has acted in cases involving the SFO, the NCA, HMRC, the Information Commissioner, the Electoral Commission and various professional disciplinary bodies.

 

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